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Table of Contents
Introduction. 2
Summary of Overall Performance. 3
Financial Ratios. 4
Liquidity Ratio. 4
Profitability Ratios. 7
Asset Management Ratios. 11
Leverage Ratio. 16
Conclusion. 17
Recommendations. 17
Reference list 18
 
 
 
 
 
 
 
 
 
 
 

Introduction

Sky Hotel offers various hospitality services in its hotels. These services are mainly categorized into three main segments: rooms segment, food and beverage segment, and other departments segment. This paper has a financial analysis of the company’s overall performance. In particular, the analysis aims at identifying if there are any weaknesses in the performance of the business and how these challenges can be overcome. In this regard, the paper will use ratios to identify the performance of every segment of the business. Finally, it will make recommendations on the areas that the business should improve.

Summary of Overall Performance

The value of Sky Hotel increased in end of year when compared to that of its second quarter. The value of total assets rose from $43475955 to $44829888. Similarly, the value of current assets increased from $2438557 to $3406334. The long-term assets rose from $41037398 to $41423554. As at December, the ownership and control the total assets was made up of 92.4% of the net long term assets and 7.60% of total current assets.
As at December, the current liabilities of the company made up 0.77% of the total liabilities and capital. The share of the long-term liabilities was 35.04%. The owner’s equity had the highest share at 64.19%, which was distributed as 33.46% in share capital and 30.73% as retained earnings. From this analysis, it is clear that the business relies mostly on its own capital and long term liability to finance its activities. Therefore, the company should find whether the cost of various alternative sources of capital are cheap so that it can expand its business much quicker. In addition, this method will enable the company to issue a larger portion of its net income as dividends to its shareholders. As at the “End of Year Performance”, which is shown at December, the total liabilities and equity of the business increased from $42,189,626 to $44829888 when compared with the January performance.
The net profit of the 4th quarter was $858,563 in the third quarter it was $1,251,325, in the 2nd quarter it was $878,993, and in the 1st quarter it was $673,748.
Rooms department revenue were $2,735,930 in 4th quarter, 3rd quarter $3151,115, $2,721,845 in 2nd quarter, and $2,467,015 in 1st quarter. Food and beverage 4th quarter, $1237,094 in 3rd quarter, $1,182,689,  $934 in 2nd quarter, $795,864 in first quarter. Other departments $286,682, $332,310 in 3rd quarter, $315,412 in 2nd quarter, and $291,416 in 1st quarter.
These ratios indicate that rooms department was the highest earner for the business, it was followed by the food and beverage department. Other department was the least performer. The financial ratios will be used to give an overall performance of the company and decide on the best approach for each department.

Financial Ratios

Financial ratios are important indicators of the business performance. Accordingly, they are used by financial analysts when evaluating the performance of a business. The main categories of financial ratios which are used in assessing a business are liquidity, profitability, asset management, and leverage ratios. Liquidity ratios measure the ability of a business to repay its debts when they fall due. Profitability ratios measure how the business is attaining its main objective of earning a profit (Kieso, Weygandt, & Warfield, 2016). The asset management ratio analyzes the effectiveness of the company in using its available assets. Finally, leverage ratios indicate the long-term ability of a company in repayment of its debt when they are due.

Liquidity Ratio

The current ratio is a liquidity ratio that indicates the ability of the company to repay its short-term debts. Generally, this ratio is calculated a below.

Current ratio= Current Assets/ Current Liability

4th Quarter
Total current assets in December Period= $3,406,334
Total current liabilities in December Period= $344,964
December Period:
Current ratio for December (4th Quarter) = 3,406,334/344,964= 9.874
3rd Quarter
Total current assets in September = $3,700,383
Total current liabilities in September= $396,717
Current ratio= 3,700,383/396,717= 9.3275
2nd Quarter
Total current assets in June = $2,438,557
Total current liabilities in June= $283,293
Current ratio= 2,438,557/283,293= 8.6079
1st Quarter
Total current assets in March = $1,731,907
Total current liabilities in March=169,772
Current ratio= 1,731,907/169,772= 10.201
The current ratios for the business are very high. In general, the current ratios should be at about 1.1. At the ratio of between 1 and 1.1, it indicates that the company has enough current assets to repay its current debts. It also shows that the business is undertaking appropriate investments using both finances as well as its own assets. Although the high current ratios of 9.874, 9.325, 8.6079, and 10.201 for 4th, 3rd, 2nd, and 1st quarter respectively shows that the business can easily repay its short-term liabilities, these high ratios also indicate that the business is not investing in various available investment opportunities.
Recommendation
Since the business has a lot of assets that can sufficiently cover various liabilities, it can engage in various investment opportunities. In this manner, the management will ensure that its shareholders get maximum value from their investments in the company. For example, if the company borrows a lot of cash such as $3,000,000, this ratio will be reduced to about 1.1. Importantly, the company will be able to engage in more profitable investments using the additional capital (Weydandt, Kimmel, & Kieso, 2015).

Quick Ratio

This ratio indicates the ability of the company to repay its short term debt using its most liquid assets. In this regard, it excludes inventories in its calculation. This ratio is calculated as follows:
Quick Ratio= (Current assets- inventories)/ Current liabilities
4th Quarter
Total current assets in December Period= $3,406,334
Total current liabilities in December Period= $344,964
Inventories December= $756,051
Quick ratio= (3,406,334-756,051)/344,964= 7.682
3rd Quarter
Total current assets in September = $3,700,383
Total current liabilities in September= $396,717
Inventories September= $582,626
Quick Ratio= (3,700,383-396,717)/582626= 5.6703
2nd Quarter
Total current assets in June = $2,438,557
Total current liabilities in June= $283,293
Inventories June= $397,710
Quick Ratio= (2,438,557-397,710)/ 283,293= 7.204
1st Quarter
Total current assets in March = $1,731,907
Total current liabilities in March=169,772
Inventories March= $260,838
Quick Ratio= (1,731,907-260,838)/169772= 8.665
Just like the current ratio, an appropriate quick ratio should be slightly above 1, at approximately 1.1. Sky Hotel ratios of 7.682, 5.6703, 7.204, and 8.665 in the 4th, 3rd, 2nd, and 1st quarter indicate that the company has a lot of assets when compared to its liabilities.
Recommendation
The business should access more credit, which will enable it to increase its investments and earn more profits. Accordingly, this method will enable the Sky Hotel to make maximum value to its shareholders.

Profitability Ratios

Gross Profit Margin

The gross profit margin ratio indicates the reward that a business makes from all its sales. It is normally expressed as a ratio of the net sales, which is calculated as below.
Gross Profit Margin= (Sales-Cost of Sales)/ Sales
“End Year Performance”
Sales= $16,452,135
Cost of Sales
Total Departmental Expenses= $5,532,129
Total Undistributed Expenses= $3,183,560
Management Fee=$870594
Total Fixed Charges= $2,043,946
Therefore, Total Cost of Sales= $11,630,229
Gross Profit Margin= (16,452,135-11,630,229)/16,452,135= 0.293
The gross profit margin was 0.296 in “End Year Performance” This ratio indicates that the business has been making a lot of income.
Recommendation
In order for the Sky Hotel to continue having high performance, it must reduce most of its non-essential costs. Generally, a reduction in these costs will lead to increased profitability, and accordingly a high-profit margin for the company.

Net Profit Margin

The net profit margin indicates the portion of net income relative to the sales in the business. These ratio is calculated as follows:
Net Profit Margin= Net Income/ Sales
“End Year Performance”
Net Profit= $3,662,629
Sales= $16,452,135
Net profit margin= 3,662,629/16,452,135= 0.2226
4th Quarter
Net Profit= $858,563
Sales= $4,205,301
Net profit margin= 858,563/4205301= 0.20416
3rd Quarter
Net Profit = $1,251,325
Sales = $4,720,519
Net Profit Margin = 1,251,325/4,720,519= 0.26508
2nd Quarter
Net Profit June= $878,993
Sales June= 3,972,023
Net Profit Margin= 878,993/3,972,023= 0.2213
1st Quarter
Net Profit March= $673,748
Net sales = $3,554,295
Net profit margin= 673,748/3,554,295= 0.18955
Sky Hotel had a net profit margin of the entire year in the 4th, 3rd, 2nd, and 1st quarter, the business had profit margins of 20.416%, 26.508%, 22.13%, and 18.955%%. Evidently, this rate is lower than that of the gross profit margin. Mainly, the tax component which was used to determine the net income is the cause of this decline.
Recommendation
Since the cost of the tax is what has mainly led to the high decline in net profit margin when compared to gross profit margin, the business should restructure its sales mix and focus on those that are tax exempt, or that have low tax charges. As a result, the tax component will not have a huge impact on the business profit.

Return on Assets

The return on assets indicates the amount of income that Sky Hotel generates from its assets. It is calculated as shown below.
Return on Assets= Net Income/Average Total Assets
Entire Period
Net Profit= $3,662,629
Opening total Assets= $44,946,342
Closing Total Assets= $44,829,888
Return on Assets= 3,662,630/ [(44,829,888+44,946,342)/2] = 0.08159
The company has a return on assets of 8.16%. This low return ratio indicates that Sky Hotel is underutilizing its assets. In general, this ratio indicates that Sky Hotel makes $0.0816 per every dollar it has invested in its assets.
Recommendation
In order to increase this ratio, the business should make more investments and sales. Since this ratio indicates that the company has a lot of idle assets, it can diversify its investments in order to make maximum reward from these assets.
Return on Equity
This ratio indicates the amount of income that the business generates from its shareholders’ equity. This ratio is calculated using the ratio below.
Return on Equity= Net Income/ Average shareholders’ equity
Entire Period
Net income= $3,662,630
Opening Equity= $15,000,000
Closing Equity= $15,000,000
Return on Equity= 3,662,630/ (15,000,000) = 0.24417
Sky Hotel had a return on equity on December Period of 24.417%. This figure on return on equity was good. Nonetheless, the company can improve this performance by diversifying into more profitable business so that it can fully utilize its excess equity and capital.

Asset Management Ratios

Days Sales Outstanding

This ratio indicates how long the company takes to collect its debts. Therefore, it is an important indicator of how Sky Hotel manages its debt assets. Ordinarily, a business will prefer to collect debts quickly. However, the rate of debt should not be so fact that it scares away investors from investing in the business. The day’s sales outstanding is calculated as below.
Days Sales Outstanding= (Accounts Receivable*365)/ Net sales
4th Quarter
Accounts Receivable December= $1,109,408
Net sales = $4,205,301
Days of Sales Outstanding= (1,109,408*365)/4,205,301= 96.29 days
3rd Quarter
Accounts Receivable= $1,227,394
Net sales= $4,720,519
Days of Sale Outstanding= (1,227,394*365)/4,720,519= 94.904days
2nd Quarter
Accounts Receivable= $1,028,476
Net sales= $3,972,023
Days of Sale Outstanding= (1,028,476*365)/3,972,023= 94.509 days
1st Quarter
Accounts Receivable= $1,027,421
Net sales= $3,554,295
Days of Sale Outstanding= (1,027,421*365)/3,554,295= 105.5086 days
Sky Hotel has many days of sales outstanding of 96.29 days in the 4th, 94.904 days in the 3rd quarter, 94.509 in the 2nd quarter, and 105.5086 days in the 1st quarter. These figures indicate that the hotel’s debtors are staying with the company’s cash for so many days before they repay these obligations. Ordinarily, this trend usually affects the company’s ability to finance its short-term obligations such as purchasing inventories.
Recommendation
The business credit team should minimize the credit period that it offers its customers. In effect, there will be a faster repayment of the company’s debts which will ensure that the company has enough cash to finance its short-term obligations (Warren, Reeve, & Duchac, 2015).

Accounts receivable turnover

The accounts receivable turnover indicates the number of times that a business collects its accounts receivables from its debtors. Therefore, a high turnover indicates a greater rate of collecting cash, which is good for the business. The accounts receivable turnover is calculated using the formula below.
Account receivable turnover= Net sales/ Average accounts receivable
4th Quarter
Net sales = $4,205,301
Opening Accounts Receivable (3rd Quarter Closing) = 1,227,394
Closing Accounts Receivable= 1,109,408
Accounts receivable turnover= $4,205,301/ ((1,227,394+1,109,408)/2) = 3.599
3rd Quarter
Opening Accounts Receivable (2nd Quarter Closing) = $1,028,476
Closing Accounts Receivable = $1,227,394
Net sales= $4,720,519
Accounts receivable turnover= 4,720,519/((1,028,476+1,227,394)/2)= 4.185
2nd Quarter
Opening Accounts Receivable (1st Quarter Closing bal.)= $1,027,421
Closing Accounts Receivable = $1,028,476
Net sales= $3,972,023
Accounts receivable turnover= 3,972,023/((1,027,421+1,028,476)/2)= 3.864
1st Quarter
Closing Accounts Receivable= $1,027,421
Opening Accounts Receivable= $0
Net sales= $3,554,295
Accounts receivable turnover= 3,554,295/((1,027,421+0)/2)= 6.9188
The accounts receivable for the 4th, 3rd, 2nd, and 1st periods were 3.599, 4.185, 3.864, and 6.918 respectively. This period indicates that the company collected its debts 3.599, 4.185, 3.864, and 6.918 times an year in the 4th, 3rd, 2nd, and 1 quarters. The first quarter cannot be fully relied on since it occurs at the time when the business was opened. The company should increase the rate of debt collection so that it can have adequate cash flow for its business.
Recommendation
The business should reduce its credit period, which will ensure there is a faster repayment of debt. As a result, the business accounts receivable turnover will increase, which will indicate increased efficiency in the debt collection by Sky Hotel.

Asset Turnover

Asset turnover indicates how efficiently the company is utilizing its assets to generate more income. The asset turnover of the company is calculated as follows:
Assets turnover=Net sales/ Average total assets
December Period
Net Sales= $16,452,135
Opening Assets= $44,776,130
Closing Assets=$44,946,342
Assets turnover= 16,452,135/ ((44,776,130+ 44,946,342)/2)= 0.3667
4th Quarter
Net sales= 4,205,301
Opening Assets=$44,499,275
Closing Assets=$44,829,888
Assets Turnover= 4,205,301/ ((44,499,275+44,829,888)/2)= 0.09415
3rd Quarter
Net Sales= $4720519
Opening Assets= $43,475,955
Closing Assets= $44,499,275
Assets Turnover= 4,720,519/((43,475,955+ 44,499,275)/2)= 0.1073
2nd Quarter
Net Sales= $3,972,023
Opening Assets= $42,499,145
Closing Assets=$43,475,955
Assets Turnover= 3,972,023/((42,499145+43,475,955)/2)= 0.0924
1st Quarter
Net Sales= $3,554,295
Opening Assets=0
Closing Assets= $42,499,145
Assets Turnover= 3,554,295/ (42,499,145/2) = 0.16726
The assets turnover in the 4th, 3rd, 2nd, and 1st quarter were 0.094, 0.1073, 0.0924, and 0.16 respectively. This figures indicate that the total year’s sales only account for a small percentage of the company’s assets. As a result, the slow rate of assets turnover in the company indicates that the business has high levels of inefficiency.
Recommendation
The business should increase its marketing efforts so that it can have more sales and fully utilize its excess capacity. Alternatively, it can diversify some of its unutilized resources into more lucrative and viable businesses (Miller-Nobles, Mattison, & Matsumura, 2015).
This actions will result in the business having a high assets turnover and more profits (Wild, Shaw, & Chiappetta, 2010).

Leverage Ratio

Debt ratio

The debt ratio indicates the percentage of the business that is financed using credit finances. As a result, it is an important ration in informing businesses on how the manage their credit policies. This ratio is calculated as follows:
Debt Ratio= Total Liabilities/ Total Assets
4th Quarter
Total Liabilities= $16,052,259
Total assets= $44,829,888
Debt ratio= 16,052,259/44,829,888= 0.35807
Debt ratio= 0.35807
3rd Quarter
Total Liabilities= $16,580,209
Total assets= $44,499,275
Debt ratio= 16,580,209/44,499,275= 0.3726
2nd Quarter
Total Liabilities= 16,808,214
Total Assets= 43,475,955
Debt ratio= 16808214/43475955= 0.3866
1st Quarter
Total Liabilities= 16,710,397
Total Assets= 42,299,145
Debt ratio= 42,299,145/16,710,397= 0.39505
The debts ratios for the company were 0.35807, 0.3726, 0.3866, and 0.39505 in the 4th, 3rd, and 1st quarter. This ratios indicates that the business largely finances its activities. While this measure is not bad, it also implies that the business resources are tied in non-income generating capital investments.
Recommendation
The business should restructure its capital policy so that it starts to access credit. In particular, Sky Hotel should use the weighted average cost of capital when determining the most appropriate source of capital for its investments.

Conclusion

To sum up, the financial analysis of Sky Hotel indicates that although the company has been making huge profits, it has not been efficiently utilizing its resources. Therefore, in order for it to make maximum profits, it must implement strategies that optimize its current assets so that it can create maximum value for its shareholders. In particular, the company almost entirely finances all its expenditures using shareholder’s capital and the company’s retained earnings. As a result, it is unable to invest these funds in projects that would enable it to make more profits. The current ratio of Sky Hotel clear elaborates the company’s reliance on its own finances to carry out various investment. Nonetheless, the company’s management has prudently managed its finances. As a result, the hotel has been retained its profit margins at above 20%.

Recommendations

Going forward, the company should address three main issues; how it manages its creditors, its debtors, capital structure, and investments.
Debtors: Sky Hotel should reduce the credit period it issues to its debtors. In effect, it will be able to have adequate cash reserves for its daily activities. In this regard, the company must be careful not to issue extremely stringent measures that would result in some customers shifting to more lenient traders.
Creditors: Sky Hotel should negotiate with all its creditors for an extension of its credit period. Generally, this extension will improve the company’s liquidity since it will be able to finance its activities without using its own cash.
Capital Structure: Sky Hotel should restructure its capital structure in order to remain competitive. Generally, every source of capital always has a cost. If the source of capital is from shareholders, they mostly require high payment of dividends, sources such as debentures require high-interest payments, while financial institutions also require high-interest payment. Therefore, a business must structure its sources of capital in a manner that will not limit its success. Generally, an over-reliance on shareholders may limit the business ability to expand due to the payment of high dividends. In light of this, Sky Hotel should restructure its capital in order to form the most optimal mix.
Investments: Sky Hotel should diversify its investments. From the analysis, the company is not adequately utilizing its assets and equity. Part of the reason may be due to lack of investment opportunities in the hotel industry. In light of this, the company should consider expanding its investments to other better-performing industries.
 

Reference list

Kieso, D., Weygandt, J., and Warfield, T. (2016) Intermediate accounting (16th Ed.) Hoboken, NJ: Wiley.
Miller-Nobles, T., Mattison, B., and Matsumura, E. (2015) Horngren’s financial & managerial accounting (5th Ed), New York, NY: Pearson.
Warren, C., Reeve, J., and Duchac, J. (2015) Accounting (26th Ed.), New York, NY: Cengage Learning.
Weydandt, J., Kimmel, P., and Kieso, D., (2015) Accounting principles (12th Ed.), Hoboken, NJ: Wiley.
Wild, J., Shaw, K., and Chiappetta, B., (2010) Fundamental accounting principles (20th Ed.), New York, NY: McGraw-Hill.